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Prices Compared to Historic Trend Lines

Last week, we did a blog post on house prices as compared to income levels. We showed that, using historic ratios, house values were lower than previous norms. Many people asked us if we believe that home prices were about to increase. As we said in the post:

Some experts are predicting that today’s values will drop and not be seen again until the middle of 2012 at the earliest. We concur with these estimates…

We understand that prices are determined by supply and demand. Inventories are still very high and a lack of consumer confidence is limiting demand. Prices will continue to soften through the first half of 2011 (most experts are calling for a 5-8% decline) before appreciating again.

However, the current market has been dramatically impacted by a foreclosure crisis never before experienced. What will happen when this cloud of distressed properties starts to dissipate? Where will prices be as compared to previous markets? Have we already surrendered the ‘bubble’ increases we experienced in the middle of the decade?

Research firm Macro Markets sheds some light on this issue in their Gap Gauge . The website describes the gauge as:

… the difference between the current level of a home price index and its baseline trend level. The baseline trend is derived by extrapolating the average rate of index growth before 2000, the year when prices in many real estate markets began appreciating at unprecedented and unsustainable levels. Gap measures the percentage difference between a current index level and its corresponding baseline level.

Basically, it compares the current Case-Shiller Price Index with a trend line of where prices would be based on pre-bubble appreciation. Below is their chart:

As we can see, current national prices are 6.84% LOWER than where the historic trend line says they should be.

Bottom Line

Prices are still declining because of dynamics unique to this particular housing market. Once we return to the factors which normally determine property values, prices should appreciate nicely.